AGNC investment (NASDAQ: AGNC) is a productive dividend stock. The mortgage-focused real estate investment trust (REIT) pays a monthly dividend that currently yields more than 14%. That is more than 10 times higher than the S&P500 (1.3% return).
The Mortgage REIT has paid out its monster dividend for 55 months in a row. That’s impressive considering the market conditions it has endured in recent years. The expectation is that the environment will be much more positive in the futurethe REIT’s monster dividend seems safe.
AGNC Investment has a very simple one strategy. It invests in mortgage-backed securities (MBSs), these are pools of residential mortgages that are protected against default risk by government agencies Fannie Mae. That’s why this one fixed income investments generate returns with very low risk.
Agency MBSs also have relatively low returns (mid to high single digits). The mortgage REIT can increase its returns by using leverage (i.e. borrowing money) to purchase more MBSs. It makes money from the spread between financing costs and returns on its MBS investments. The greater the spread, the more money can be made.
AGNC Investment has made enough money to cover costs current dividend payment over the past four and a half years. That’s notable because recent years have been a more challenging period in the MBS market due to the significant increase in interest rates. Higher interest rates have increased the REIT’s financing costs, narrowing its investment diversification.
However, circumstances never reached the point where the REIT felt it necessary to cut its dividend, something it has had to do several times in the past:
Peter Federico, CEO of AGNC Investment, commented on ideal market conditions for the REIT in his third quarter earnings report. He noted: “AGNC’s return opportunities are most favorable when MBS spreads over benchmark rates are wide and stable and interest rates and monetary policy are less volatile.” In other words, stable market conditions are ideal because they provide great insight into profit opportunities.
For much of the past few years, the Agency MBS market has been much more volatile due to all the uncertainty surrounding interest rates. With the Federal Reserve recently changing its policy from fighting inflation with higher interest rates to a more neutral stance with lower interest rates, the outlook for the MBS market is much brighter than it has been in recent years. The REIT believes that MBS spreads will stabilize at historically favorable levels over the next one to two years as the Fed slowly cuts rates. That should allow the company to make more than enough money to continue covering its high-yield dividend.
